European Commission publishes review of the VAT rules for financial and insurance services

As announced in its action plan for “fair and simple taxation supporting the recovery strategy” published in July, the European Commission is considering potential changes to the exemption for financial and insurance services, aiming to reduce complexity, legal uncertainty, and costs for sector operators and, ultimately, their customers.

In its “combined evaluation roadmap/inception impact assessment” document, the Commission identifies some long-standing problems with the exemption for financial and insurance services. While there were many reasons for the exemption when it was first introduced in 1977, the rules have, according to the Commission, become outdated and are complex and difficult to apply.

The document notes that the VAT exemption has not kept pace with new kinds of financial services, such as fintech, cryptocurrency and e-money services. The complexity associated with the exemption has also led to increasing litigation before the CJEU.

The document comments on cost-sharing arrangements used to mitigate costs in the finance sector and acknowledges the implications that the CJEU case-law (which has held that the cost sharing exemption only applies to activities in the public interest) has had for that sector.

The Commission proposes two policy options:

• remove the exemption entirely, which could simplify VAT rules for the financial and insurance sector and eliminate the costs of irrecoverable input VAT.
• retain the exemption but narrow its scope to cover only some service types, such as those that are fee-based rather than interest-based.

The Commission is seeking input on the document until November 19 and expects to hold a public consultation in the first quarter of 2021.

DLA Piper comment: Current VAT rules for financial and insurance services are complex and often the subject of litigation. The commission have tried and failed in the past to update and modernize the rules, but it is difficult to obtain agreement between member States. We would be delighted to assist you with making any representations during the public consultation process in the first quarter of 2021.